Why you should ignore investment advice from friends and family

Vikas Patni has not invested in stocks since he racked up huge losses in the derivatives segment in 2008. “I lost Rs 12 lakh in just two days as my broker squared off the positions,” says the Delhi-based self-employed professional. Patni had ventured into the stock market after seeing his cousin make astounding gains. He took the plunge in 2007.

Every stock he purchased gave good gains, which boosted Patni’s confidence and risk appetite. But the multi-year bull run was coming to an end and Patni’s next move was disastrous. Egged by his cousin, he started dabbling in derivatives, unmindful of the high risk the segment entails.

In 2008, when the markets crashed, he lost much more than what he had earned in the previous six months. The impact of the loss was enough to make him swear off the markets for good.

Vikas Patni, 34, Self-employed, Delhi
Took a cousin’s advice and put money in stock derivatives to earn high returns.
Outcome: Incurred a loss of Rs 12 lakh in two days
Lesson learnt: Retail investors should not venture into the F&O market. If trading, following stop loss is a must.

Like Patni’s cousin, most people are happy to dish out advice, whether useful or not. While you usually know to take such wisdom with a pinch of salt, sometimes it’s too tempting to resist taking advice from people who swear it has paid off for them. This is especially common in the case of financial advice from friends and relatives. Whether it’s a friend recommending a winning stock or an older relative telling you that real estate and gold never fail.

Several studies in the field of behavioural finance show that peers can influence our stock market participation and asset-buying decisions. “Money matters are very personal, hence people tend to rely on close friends or relatives for advice regarding saving and investments,” says Dhaval Kapadia, Director, Portfolio Strategist, Morningstar Investment Adviser India.

Rahul Jain, Head of Retail…

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